Key Inventory & Pricing Strategies for Manufacturers

Managing costs and pricing effectively is one of the biggest challenges facing manufacturers today. In this video, CK principals, Deanna Salo and Brian Kot draw on decades of experience working with manufacturing clients in the Chicago area to discuss the common pricing pitfalls from an incomplete bill of materials to outdated costing models. These can erode profitability. They also explore how frequently businesses should be reviewing and updating their costs in today’s market, how to align your sales force with profitability goals and how strategic focus on core competencies can drive long-term success. Whether you’re a seasoned manufacturer or growing your operations, this conversation offers practical insights to help improve your margins.

Transcript:

Deanna: I’m Deanna Salo, and I’m the managing principal of Cray Kaiser Limited CPAs. And today I’m here with one of our other principals, Brian Kot. And we’re going to be talking about our manufacturing clients. Cray Kaiser performs a number of services and has for our tenured period of time over 53 years with our manufacturing clients here in the Chicago area. And we want to talk about today some of the key indicators, the key challenges. Some of the key observations we have when we’re performing our auditing advisory review tax planning procedures with our clients. So inventory, right, huge item on a client’s financial statements, really the brick and mortar of their profitability. We really want to focus in on you know how clients are modeling their pricing to ensure they’re capturing all of their costs when they’re going out to bid in their pricing. You know the pricing models that we’ve seen some of our clients, I guess what are some of the shortfalls that they have in terms of their pricing models.

Brian: I think the shortfalls having the pricing models is they don’t include all the costs it truly takes to manufacture the product. And they might pick up labor and I know I pay a guy X dollars an hour but they forget about the other employment costs, the taxes that go along with that. And another big thing I see missed is also sometimes the rent costs and the building maintenance some of those other overhead costs that go into your facility to run your plant and your operations, those often get missed.

Deanna: Right. So really what I call making sure your bill of materials, your BOM is fully loaded. You’ve got to make sure that those costs are in your pricing model so that when you’re telling your sales force to go out there and sell your goods that you really know what your gross profit margin might be on those fully loaded costs. Again, the sales force, sometimes the sales force, their drivers are to go out and sell. Go out and sell. And their financial acumen might not be at the calibration that they really know what the gross profit margin is for a certain company. So really educating your sales force to really understanding the financial pieces, the labor costs, the rent costs, the burden costs with respect to how to model the pricing. We’ve also seen some clients shift their commissions, right, and payments to their sales force, not on, you know, sales volume, but also on gross profit margin, right? And making sure that they’re yielding the right profitability consistently. You know, they might have some volume discounts. They might have some other perks for some of their specific customers. But really making sure that they’re honing in on all of their related bill of material costs is a really important part of that, too. What’s some of the other things that they should be doing in terms of making sure that the costing is there?

Brian: One thing I see often is they set a price. They look at their costing once a year. Maybe they did it last year. In today’s economy, the prices are changing so often, you know, depending on what type of raw material that you’re buying. I mean, there could be weekly swings, monthly swings in there. So I do recommend at a minimum, at a minimum, you’re reviewing your costing at least twice a year and you are updating those numbers. And that’s actually very generous when I say twice a year.

Deanna: Yeah. We have a client that does use standard pricing, standard costing. And, you know, they were only updating their prices once a year. So we got them to look at it at least four times a year, and depending upon what the variance might be, to do it even more frequently than just the once a year, right? It was something that it’s an audit client, and we do look at their processes and procedures in terms of their standard costing. And while they were uploading and getting all the pricing there, they weren’t really doing the full roll-up other than once a year. They actually now do it twice a year. But we’ve even leaned in a little bit more on them to say maybe even a little bit more often because the raw material costs is steel imports from China and the tariffs and so forth that, you know, we’ll be going out there this year to audit them. So we’ll be really interested to hear, you know, how frequently they’ve even updated it for the current year. Another thing on inventory is, you know, even on the sales side, you know, some clients are really trying to diversify right through a whole bunch of different types of sales lanes. You know, they want to expand, broaden what they’re selling, how they’re selling to stay competitive in the marketplace. You’ve got a client example that kind of didn’t do that and just stuck true to what they do.

Brian: Yeah. I had a client they were looking to expand into different lanes and kind of take over their supply chain for themselves and they thought maybe we could start manufacturing these items that we’re buying and they decided not to. And the model was we wanted to use the finances and invest in what we do well and do it better. And with that, they have had tremendous success by not expanding out and properly utilizing their capital funds.

Deanna: Yeah. So using their capital funds, reinvesting in the things that they did well, and staying honed in on their costing and profitability, and they’ve been super successful. So there’s a little bit of ying and yang, growing for the sake of growth, which a lot of people could get into that whole wheelhouse of let’s grow to grow, but also stay profitable. And even beyond that is really being able to have the leverage that they had to get the costing at a place in their existing profitability that didn’t compromise their growth. They stayed super profitable.

Brian: And if you have any questions, please contact us.

Deanna: And you can contact Deanna Salo or Brian Kot at Cray Kaiser at www.craykaiser.com. And we’re here to help. Thanks so much for listening in.